Starting a buisness with a friend?

[kdubb2772]

I have a manufacturing business idea and plan that I came up with. I also have thought of the design, features and target market that I would like to hit. I presented this idea to a good friend of mine because he knows the programing and machine operation to build these products, as he uses these machines every day for his current job. He really likes the idea and is onboard. My main question is how to divide the company. I know I could not do this efficiantly without him. I would like to share all ideas and spending with him but at the end of the day I would like to have the final say as this is a dream I have had for a long time and have a plan. So is a profit/loss split of 50/50 and ownership 55/45 a good idea? Or just do a flat out 55/45? What suggestions do you have?
I would like to see us build a stable buisness and both make a good living doing so.

I really appreciate your time and advice. Thank you

[vangogh]

Welcome to the forum kdubb. I think the only rule in figuring out a partnership split is that all the partners have to go home thinking the split was fair. If one doesn't think it's fair to him or her it will likely lead to less than the best results for the business. One additional factor you'll want to consider is that you'll looking to become partners with some who's a friend. That adds an additional challenge as the business relationship and personal relationship can get confused here and there. Going into business with a friend can certainly work, but do understand the additional challenge is there.

What I'd suggest is talking to your friend about the business and doing a few things. Tell him your reasons for wanting the controlling share and explain how this business is your dream. Listen to his response. He might be fine with a 55/45 split or maybe he'll want 50/50 profits, but be fine with you having a little more of the ownership. He might also ask that in exchange for you having a greater share of ownership and decision making he gets a greater share of the profit. The point is to talk it out sooner rather than later.

The other thing I'd suggest is figuring out who's going to be responsible for what in the business now, a year from now, 5 years from now. Try to see what each of you is contributing to get a sense for how the business should be split. You'll probably find a few things neither of you was thinking you'd do, but the business needs and maybe a few things you were both thinking you'd do. You're going to want to make sure the contribution by each of you to the business is equal to your share of the business.

In the end this is going to come down to the two of you agreeing to something you both think fair and I think talking to each other is the best way to get there. Be prepared to split things 50/50 or give your partner something extra in exchange for those few extra shares you want for yourself. Remember this has to be fair to both of you for it to work.

[LFinkle]

Partnerships are perhaps the most difficult of all relationships. Most don't succeed and that's because of the challenges they face interpersonally. Today you and your friend both want the same things. Five years from now that may not be the case. A couple of thoughts.

1. Are you both going to work full time in the business? If not then consider this when dividing up the company shares.
2. Are you both making the same financial investment? Again if not consider this when dividing up the shares.
3. Are you both going to share in the success of this and if it doesn't work so well the financial pitfalls?
4. You need to have many conversations about expectations, needs, how you make decisions, what if you don't agree (especially if you want to maintain more ownership), etc. etc.

Today the 55/45 may seem fair to both of you. If the business becomes a huge success your friend may not think so down the road. There is no right answer to your question. The bigger issues are how to make the partnership work so the business is successful. I might suggest starting off with less ownership for the friend if there is not equal investment of time and money. Perhaps with an option to let him buy in more shares in the future. Just a thought.

I've written a book on this topic called Finding the Fork in the Road. You can purchase it on Amazon or any major book retailer and if you go to the website of the same name you can download a chapter for free. Good luck to you

[huggytree]

from my experience most partnerships fail...i recommend doing it alone and hiring your friend as a worker

anything less than 50/50 pretty much guarantees failure

when you work harder than your friend will you still like splitting the profit with him?

the only partnerships i know of that are successful involve (2) people who are extremely easy going and with the same work ethic(laid back)...if either of you have any drive to be very successful it will be another nail in the coffin of your partnership...competitive people also dont work well for partnerships, so if either of you are competitive id stay away

[kdubb2772]

thank you very much for the advice... I have a lot to think about for sure.

[vangogh]

Just so you're not down on partnerships I want to say that partnerships can be a great thing in business. The issue most people have with partnerships has less to do with whether or not a partnership can work and more to do with people not being very good at choosing a partner. You want to find people to partner with who complement your skills. Where you're weak your partner should be strong. The whole should be more than the sum of the parts.

Where friends are concerned it adds to the issues you might face, because it can be hard to separate the business and personal relationship. For example we trust our friends as friends, but that doesn't mean we should automatically trust their business sense. That's not to say you can't or shouldn't go into business with friends, but that should make sure to choose them as business partners based on what they bring to the business and not what they bring to your friendship.

Again in your particular situation I think talking things through with your friend is something you should do. Explain where you're coming from and what you want and listen to where he's coming from and what he wants. You may find you're both on the same page. Once you understand each other and how each of you will contribute to the business ask yourself whether the business will be better if both of you are involved or if only you are involved. Assuming it will be better with both of you think about how much value each of you will bring and based on that decide how best to share the business.

[Business Attorney]

I'm with vg on this one. Partnerships can be very valuable. The thing to recognize is that they are ongoing. Both the contributions and the rewards change over time. In most cases, percentages that are fixed upfront almost insure failure. Most law firms, accounting firms and medical practices are either partnerships (or LLCs) or are run like partnerships even if they happen to be organized as a corporation or other entity. I don't know of any service business that even tries to treat a person working 2,500 hours a year the same as one working 1,500 hours a year or a partner with a $700,000 book of business the same as a partner with a $300,000 book of business.

The way you share the benefits of the business needs to reflect not only historic contributions but also current contributions. All of it goes into arriving at a division of profits that adequately compensates each partner for the value he brings to the business.

[vangogh]

The way you share the benefits of the business needs to reflect not only historic contributions but also current contributions.

That's a good point. How do you set that up initially? Is there some kind of review where the percentage is adjusted year over year? Does the initial agreement automatically change based on performance? I assume there's some kind of mechanism built in so that the split can be changed at a later date.

[melanie]

The above posters have all made brilliant points. Going in to business with a friend is something I would try and avoid, but only because i can't actually imagine going in to business with any of my friends. Only you know your friend though and what your friendship is like. Of course there are risks, but there are risks going in to business with anybody, whether you're friends or not. Weigh up this risks and prepare for all eventualities (selling the business, falling out, splitting profits, disagreements?...)

[MobileMarketness]

This thread caught my eye because I did go into partnership with a friend and our different thoughts on the way the business should be run cost us our friendship. Partnerships can work, obviously, but I think partnerships with friends are a huge mistake. Businesses grow and change just as people do. IMO having too many cooks in the kitchen can never work.

[vangogh]

Of course there are risks, but there are risks going in to business with anybody, whether you're friends or not.

Very true. Friends add a a set of risks built around the personal relationship. I think many people have a hard time separating the personal relationship from the business relationship. Sometimes what's right for the business is going to severely test the personal and that's not easy for many people. On the other hand friends add a level of trust since presumably you trust your friends. I think this is why so many people choose friends or relatives for partners.


I did go into partnership with a friend and our different thoughts on the way the business should be run cost us our friendship.

Sorry to hear. That does happen though. I'm guessing you went into business together less because you were a good fit for business and more because you were friends. I think when people go into partnership for the right business reasons it can work well. The partners should have strengths that complement each other. I think what tends to happen with friends is their skills overlap and they go into business together each wanting control of the same part of the business, while their friend deals with all the things they don't want to do. Or as in your case they both have very different ideas about how to run the business.

[SnellExperts]

Just so you're not down on partnerships I want to say that partnerships can be a great thing in business. The issue most people have with partnerships has less to do with whether or not a partnership can work and more to do with people not being very good at choosing a partner. You want to find people to partner with who complement your skills. Where you're weak your partner should be strong. The whole should be more than the sum of the parts.


I think it has less to do with the choosing of the partner and more with the communication flaws in the partnership. One misunderstanding can ruin the entire business plan so make sure that whoever your partner is, that they are an effective communicator.

[greenoak]

ditto with huggy...and get a good exit agreement....with teeth......partnerships can go so wrong in so many ways.... in another thread spider talked about giving the person a stake in the business without a real partnership.....
and know that the bank will go after the person with the money if it all falls apart....

[MobileMarketness]

Yes, you're absolutely right - we went into business together because we were friends and agreed our business idea was a good one. The major trouble started when we were dividing duties and we never felt the other was pulling his weight. I felt he was wasting time on the minutia and he felt I wasn't doing enough of it. So yeah... went into business together for the wrong reasons and it didn't end well.

No doubt things would go better if you partner with someone for the right reasons. :)

[vangogh]

went into business together for the wrong reasons and it didn't end well.

I think that's the key. It's not that partnerships a bad idea, it's that people choose partners for the wrong reasons. That's why so many end badly.


I think it has less to do with the choosing of the partner and more with the communication flaws in the partnership

Good point about the communication. That's definitely important when any two (or more) people are working together. Still I think it's more important to partner with the right people. If two people have the exact same skills and talents they probably aren't going to make for the strongest partnership since their abilities duplicate each other. Better for partners to have skills that complement one another.

[Reflo Ltd]

I am sure that the best way to lose a friend is to go into business with them.

I have always felt that entering into a business partnership is a bad idea unless you could not possibly operate the business without something that the partner offers... and even then it is a risk.

I would recommend that you hire the talent that you need instead of offering a partnership. If you cannot afford to do that but need this friend to start this business, then your answer is that you do need him/her and their value to this endeavor is worth something substantial.

[vangogh]

I am sure that the best way to lose a friend is to go into business with them.

I know that happens a lot. I don't think it has to, but it does seem to happen. I think I've said this a few times in this thread already that the reason for those failed partnerships is people choose partners for the wrong reason, especially where friends are concerned. They make the assumption that because they're friends they'll automatically be able to work well together and any differences will magically disappear.

You have to choose partners with skills that complement your own. One person might be the operational or creative genius while the other is the marketing and sales maven. The sum of the partners skills needs to be a lot more than the skills of either alone. And even then it's still a relationship that needs the same give and take as any other relationship.

[jwmann2]

If you've got the capital, do it yourself. He knows the machinery so put him on the payroll. You will receive tax breaks with employees so you can pay their benefits. Learn from him if he joins as an employee. Because if his employment doesn't work out for some reason, you will not how to run and operate the business yourself; 100%.